2018 (9) TMI 1631 - HC - Income Tax

Addition u/s 41 - assess the benefit derived by the assessee in the form of allotment of shares which represents deduction allowed towards the cost of production of film software during the earlier years - remission or cessation of liability occurred - Held that - We fully agree with the decision taken by the Tribunal in confirming the order passed by the CIT (A). As rightly held by the Tribunal for Section 41(1) to be attracted there should be remission or cessation of liability of a third party because the Section pre-supposes the transaction between two persons where an allowance of deduction has been made on account of loss expenditure or trading liability and subsequently during any previous year such person has obtained some benefit in respect of such trading liability by way of remission or cessation etc. Thus in the assessee s case when the software library was capitalized it cannot be said that any benefit or remission or cessation of liability occurred. - Decided against revenue

Summary

Issues:
Interpretation of Section 41(1) of the Income Tax Act regarding the taxability of benefits derived from the allotment of shares in exchange for software library value.

Analysis:
The appeal by the Revenue challenged the order of the Income Tax Appellate Tribunal concerning the applicability of Section 41(1) of the Income Tax Act. The case involved the transfer of a production unit to a private limited company in exchange for shares, with the Revenue arguing that the value of the software library credited to the assessee's account should be taxable under Section 41(1). The Assessing Officer contended that the allotment of shares represented a benefit received by the assessee, triggering tax liability.

The assessee, however, argued that Section 41(1) was not applicable as there was no remission or cessation of trading liability, emphasizing that no money was received towards the alleged liability cessation. The Commissioner of Income Tax (Appeals) agreed with the assessee, highlighting the absence of a third-party profit scenario and distinguishing the case from precedents such as K.G. Subramanyam. The CIT (A) held that the creation of an asset did not constitute income and that a mere book entry was insufficient to establish tax liability.

The Tribunal upheld the decision of the CIT (A), emphasizing the necessity of remission or cessation of liability for Section 41(1) to apply. The Tribunal rejected the Revenue's reliance on the Nectar Beverages case, distinguishing it from the present case. The High Court concurred with the Tribunal's reasoning, emphasizing that no benefit or remission of liability occurred in the case of the assessee, thereby dismissing the Revenue's appeal and ruling in favor of the assessee.

The judgment highlighted the significance of the specific provisions of Section 41(1) in determining tax liability based on the remission or cessation of trading liabilities. It underscored the need for a clear benefit received in exchange for deductions claimed in previous assessments to trigger taxability under the said provision. The decision also clarified the distinction between trading and other liabilities, emphasizing the specific applicability of Section 41(1) to trading liabilities only.